SIP vs Lump sum Invetsment

An analysis with evidence to show what suits high risk vs less risk taking people

Visshnu (Strategist)

4/18/20242 min read

Analysis of Systematic Investment Plan (SIP) vs. Lump Sum Investment in Nifty 50

Introduction: This document presents a comprehensive analysis of two popular investment strategies—Systematic Investment Plan (SIP) and Lump Sum Investment—applied to the Nifty 50 index from 2018 to the present. The analysis includes key financial metrics: Compound Annual Growth Rate (CAGR), volatility, and maximum drawdown, providing insights into the performance and risk associated with each investment type.

Investment Strategies:

  • SIP Investment: Investors commit to investing a fixed amount of 5,000 INR monthly regardless of the market condition.

  • Lump Sum Investment: A one-time investment of the equivalent total amount invested in the SIP at the beginning of the period.

Financial Metrics:

  1. Compound Annual Growth Rate (CAGR):

    • SIP Investment: 7.64%

    • Lump Sum Investment: 11.64%

CAGR provides a mean annual growth rate which normalizes the rate of return over the investment period.

  1. Volatility:

    • SIP Investment: Calculation was not feasible due to data characteristics.

    • Lump Sum Investment: 5.13%

Volatility measures the standard deviation of the investment's returns, which reflects the risk due to price fluctuations.

  1. Maximum Drawdown:

    • SIP Investment: 22.35%

    • Lump Sum Investment: 29.34%

Maximum drawdown assesses the maximum observed loss from a peak to a trough of the investment, before a new peak is attained, highlighting the potential risk from an investment.

Analysis: The SIP strategy shows a lower CAGR compared to the lump sum investment but potentially offers lower volatility and maximum drawdown, indicating less risk and smaller value drops during market downturns. The lump sum investment, while providing higher returns, also poses a higher risk as indicated by a greater maximum drawdown.

Conclusion: Choosing between SIP and lump sum investments depends on the investor’s risk tolerance, investment horizon, and market timing. SIPs might be more suited for investors looking for more consistent and less risky investment paths, while lump sum investments could appeal to those willing to accept higher risk for potentially greater returns.